2009-07-01
Recently the EU Commission published a report on taxes in Europe. It was found that high taxes tend to reduce the conditions for economic development during growth. That too many Western European countries have high tax burden is instead justified by that large welfare states are expected to reduce the shock of downturns.
It's just that the latter does not really seem to match today - when high-tax states in Europe grow slowly during the boom and being hit hard by the ongoing crisis. The report's author wonders "Does the current crisis indicate that a different economic model would be preferable?"
There are good reasons to answer yes to that question. We are not only experiencing a financial crisis, but also a globalization crisis. It is no coincidence that Indian Tata Motors bought Jaguar and Land Rover.
The new market economies of China, India and Eastern Europe are becoming increasingly important competitors to us. In many Asian economies, the tax burden is under 20 percent. Japan combines taxes of 30 percent with one of the world's most equal economies. Many Eastern European economies have not only low but also flat tax-rates.
The development of these regions means that tax competition is becoming increasingly important. The relevant question is whether Sweden can meet the global competition of today's continuing high tax burden. There are several reasons to say no to that question, two examples:
- High taxes are no longer necessarily translated to improved welfare in Sweden. The municipalities' cost per capita increased for example, adjusted for inflation, by 35 percent between1998-2008. Yet it is a common perception that welfare has not improved or even worsened, during the period.
When the municipal revenue growth increases, the municipal bureaucracy grow, when they decrease the welfare is cut down. The expected competitive advantage of high taxes is not particularly obvious.
- The new economy is based increasingly on knowledge-intensive service jobs. The high Swedish taxes are much tougher in this sector than traditional manufacturing, especially since work is taxed very high. If person A will earn money to buy a service from person B the tax is often close to 90 percent if we count both hidden and visible taxes. The black service can grow in Sweden, but how good are really the conditions for knowledge-intensive services that need a white market?
The fact that Sweden benefits from tax cuts is obvious, and also something that is becoming increasingly clear. We need to move away from a situation where the average income earners pay six out of ten earned crowns in visible and hidden taxes, or where the highest marginal tax rate is at 74 percent.
The question is whether the political will exists to implement the necessary fiscal reforms?